Real Business Cycles in Emerging Economies The Role of International Growth and Interest Rate
Published in Investigación Económica, 2011
Recommended citation: Fernández, R., Vera-Valdés, J.E., and Venegas-Martínez, F. (2012). "Real Business Cycles in Emerging Economies The Role of International Growth and Interest Rate." Investigacion Economica. 71(279). https://vbn.aau.dk/da/publications/real-business-cycles-in-emerging-economies-the-role-of-internatio-2
This paper develops a dynamic stochastic general equilibrium model (DSGE) for a small open emerging economy (SOEE) where the interest rate is decomposed into an international rate and a country risk component. We show that if exports respond negatively to the international interest rate or to an international recession, the aggregated consumption of the domestic economy is substantially more volatile than an economy where exports do not react. In other words, this paper finds a coherent explanation to the riddle when either industrialized countries are growing too fast or face a recession, developing countries suffer.